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Bank of Estonia governor Madis Muller – the central bank should not be involved in shaping climate policy

Bank of Estonia governor Madis Muller and Prime Minister Kaja Kallas responded to MPs’ interpellations concerning the connection between European banking and climate policy in the Riigikogu on Monday.

Muller responded to an interpellation on the European Central Bank’s pressure on the Basel Committee submitted by MPs Rain Epler and Martin Helme.

The central bank governor answered the question whether, in his opinion, the European Central Bank and national central banks should be actively involved in climate policy and why. According to him, the central bank is not and should not be involved in shaping climate policy.

“This is clearly the task of national governments and parliaments. The main task of the Bank of Estonia in Estonia and the main task of the European Central Bank in the euro area is to do everything in the central bank’s power to ensure that the price increase is moderate enough and that the euro, as our money, does not lose its value too quickly,” Muller said.

However, he said that central banks are affected by issues related to the climate in two ways.

“First, both climate change itself and climate policy can affect the economy and various prices quite directly. Therefore, we must take both of them into account in our economic analysis and also in the formulation of monetary policy as best as possible. Secondly, and this may be a little-known piece of information, in addition to the main mandate, the European Central Bank has a secondary mandate according to the European Union treaties, which stipulates that as long as it does not conflict with the central bank’s main task, that is, the efforts made to ensure price stability, the European Central Bank should also support the economic policy of the European Union in general in its activities. This also includes the climate policy of the European Union, which clearly affects the economy,” Muller added.

“Thus, consideration of climate issues is not a voluntary activity for the European Central Bank, but has also been the will of the legislator,” he said.

According to Muller, the impact of climate policy and climate change is broad, extending beyond the environment, affecting the economy and financial systems, with significant liabilities for central banks as well.

“Climate change causes extreme weather events that can disrupt economic activity, damage infrastructure, and reduce productivity. Such changes can affect supply chains, increase price volatility, and lead to faster price increases for certain products or services,” he said.

The central bank governor pointed to the fact that the transition to a carbon-neutral economy means large-scale investments in the introduction of new energy sources as well as in the provision of products and services with innovative technology in several economic sectors.

“All of this has a potential impact on various prices and is therefore directly related to the main task of the European Central Bank and other central banks, which is to maintain price stability,” Muller said.

Muller pointed out that the impact of climate change on monetary policy is not only hypothetical. The European Central Bank has estimated that, for example, the heat wave of 2022 raised food prices in the euro area by nearly 0.7 percent, and the impact of this effect extended into 2023.

“That is why we have improved our models, which we use in macroeconomic analysis, on the basis of which we make monetary policy decisions. In these analyses, we also try to take into account the risks arising from climate change and the various effects of decisions related to climate policy,” he added.

“Furthermore, climate change and climate policy directly affect central bank assets. If central bank assets, such as bonds or other financial instruments, are linked to economic sectors affected by climate change, the central bank’s balance sheet is also directly exposed to climate risks. Therefore, it is responsible, one might even say imperative, for central banks to integrate climate risks into their risk management processes in order to protect our balance sheets and thus our ability to perform our tasks,” Muller said.

He stated that the European Central Bank’s Governing Council once again does not specifically discuss individual issues that are discussed in the Basel Committee, which is a global forum for discussing issues related to banking supervision and regulation. The members of the Basel Committee are banking supervisors and central banks from major countries, but also the European Central Bank, foremost as a banking supervisor.

Muller confirmed that the European Central Bank generally supports as uniform an approach to climate risk management as possible, and disagreements between supervisors in different countries often focus on how to measure and manage climate risks most effectively, but the general direction nevertheless is to support the promotion of practices that take environmental risks into account as well as possible in global banking.

“Having said that, in my opinion, it is also completely expected that the supervisors of different countries have different views on certain issues and the Basel Committee is the place where, by smoothing out these differences and discussing these issues, attempts are made to agree on globally valid common minimum standards,” the central bank governor said.

Prime Minister Kaja Kallas responded to interpellations about state financing of elective abortions, the inconsistency of motor vehicle tax with European Union law, and the inconsistency of motor vehicle tax with the Constitution and European Union law.

MPs also withdrew from handling an interpellation submitted to the prime minister on the planned name change of the Defense Resources Agency.

Source: BNS

(Reproduction of BNS information in mass media and other websites without written consent of BNS is prohibited.)


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